In 2019, Hong Kong’s Securities and Future Commission (SFC) introduced new rules that impacted how trade execution took place in the territory. The regulatory changes applied to online distribution and advisory platforms and, in effect, brought about the end of ‘execution-only’ business in Hong Kong for everyone but large established banks.
What did the changes mean?
The regulatory changes require the classification of all products sold. The move came about as the emergence of online trading conducted by high-net-worth individuals had led to a gap in the accountability of trade execution and the sales process.
Previously, disclaimers and checkboxes allowed for false or partial execution-only (sometimes known as “reverse inquiry”) transactions, which allowed them to avoid traditional compliance measures.
This meant that a relationship manager could push an uncovered product to a client. This kind of product might be challenging for the client to transact through normal channels successfully. The client would then be encouraged to go online, click the ‘I Agree’ buttons, and then trade. This form of trade execution raised a variety of questions as to the influence of the relationship manager.
What kind of interactions between the relationship manager and client could count as a recommendation?
Despite what, to many observers, looked like attempts to take advantage of a particular loophole, little evidence was found to support unethical or risky behaviour on a significant scale.
Prior to the changes, the private wealth management industry in Hong Kong already had to meet a range of SFC requirements, such as KYC (know-your-client) and client suitability. Since the regulatory change, any engagement regarding a product or uncovered security that could be construed as active on the part of a relationship manager might be deemed as risky behaviour.
A level playing field
Before the changes were introduced, many observers and industry insiders believed that it was easier for start-ups, new entrants, and smaller institutions to compete with large banks in markets, products and trade execution.
While larger private banks retained advantages in terms of reach and scale, more agile and flexible companies were able to find points of competition. The new regulations from the Securities and Future Commission’s (SFC) effectively skewed the playing field towards the larger institutions.
Asia-Pacific trade execution you can trust
If you’re trading in Hong Kong and Asia-Pacific markets, you need to find an efficient and dependable trade execution service. The regulatory framework is continually evolving, and to keep abreast of these changes, any trade execution service should have experienced financial professionals who understand the territory. A core strength of the GIS Group is our local knowledge and experience.
The group of top-grade professionals in our team have the experience to deliver the very best service to our growing client base. Our team has over a century of combined experience at Tier-1 financial institutions, including such global names as Barings, LCF Rothschild, ICAP, Barclays, Blackrock, JP Morgan, Lehman Brothers and Morgan Stanley.
This experience and local knowledge give us an advantage over companies who offer execution-only services at an arm's length from the territory.
Call+852 3018 3009 or email [email protected] to find out more about our services.